Sovereign Debt and Bank Worries

Stock traders tonight are worried about bank liquidity and sovereign debt. These are the kinds of worries that make it hard for stock markets to stay at the elevated levels they have been at this year.

The specific worries at this hour are about banks in Europe, the government budget in Italy, political gridlock in the U.S. Congress, and a hint of a slowdown in transportation activity in China, but it would not be much different if we were worried again instead about a hurricane in the Gulf of Mexico, instability on the Arabian Peninsula, radioactive food in Japan, and a drought in grain-producing regions. The point is, there is a long list of problems and weak points that the world has not had the wherewithal to address, and these runs of bad news will continue for some time to come. It is only if we decide that fingers crossed and chewing gum are not enough to hold everything together that things will start to settle down.

As to the specific worries about the banks, it is a good time to remind everyone that there are plenty of banks in most countries, and that even if all the banks in one region or country were to fail, it does not take much to put together a replacement transaction clearinghouse. There is no risk of running out of banks, no matter what happens to sovereign debt or the other issues financial traders are worried about tonight.

Cash Again

I got more cash than usual on my visit to the bank yesterday. This month, I have resolved to pay for most of my in-person purchases in cash.

Two years ago, in June 2009, I spent a month where I tried to pay for everything in cash. It didn’t entirely work. Some of the things I wanted to purchase weren’t easily available in local stores. Paying for gasoline purchases in cash was far more work than paying at the pump with a card. Paying in cash requires a higher level of mindfulness and record-keeping that I couldn’t always manage.

My objective then was to see how someone might do without a credit card. Credit cards, which had dominated the American commercial landscape since the early 1980s, were just beginning to lose their luster in 2009. In the two years since, the average consumer has switched from credit cards to debit cards. Now with banks imposing new fees on debit cards, some consumers are making the switch to cash. I never got a debit card myself, but I can see the point in the switch to cash.

When you pay for a purchase in cash, the entire amount you pay goes to the seller. By contrast, when you pay with a card, the bank keeps a transaction fee and pays only perhaps 98 percent of the purchase to the merchant. This isn’t a pure financial gain for the retailer — when you pay in cash, the retailer has to pay a cashier to count the money, which is itself a form of work and an expense for the retailer. A cash transaction is still a smaller expense than an electronic clearinghouse transaction. When people pay in cash, the result is more jobs for cashiers and fewer retail stores closing. At this point, both effects would be good for the economy.

The gains from paying in cash are negated if you have to drive to the bank more often. Paying ATM fees to make cash withdrawals also largely defeats the purpose of paying in cash. It takes a kind of planning — you can call it cash management — to use cash efficiently. Before about 1972, this was a skill that was second nature to everyone in a cash-oriented commercial culture. It is a skill that I now want to relearn.

Television Subscriptions Decline

People are canceling their TV subscriptions. There were more than half a million U.S. households who pulled the plug on cable in the second quarter, according to a new research report. The 0.5 percent decline in viewers won’t alarm the TV industry, especially as the lost customers tend to be some of the least dedicated viewers, but the lost revenue will heighten the financial distress of an industry that seems to be perpetually in distress.

More importantly, the United States is turning into a TV-optional culture, where asking people to tell you about last weekend’s MTV Video Music Awards broadcast is as socially acceptable as watching it yourself. In a time-pressured society, that is no small matter. When it really sinks in that you don’t have to have a TV subscription, half of TV households may think about canceling.

This Week in Bank Failures

With the major banks in August pulling out of settlement talks over mortgage fraud, enforcement actions are on the way from regulators, and the first shoe dropped tonight with lawsuits by the Federal Housing Finance Agency (FHFA). The suits reportedly seek tens of billions of dollars for losses from improperly documented mortgages, mortgage-backed securities that were incorrectly described, and securities that included mortgages that the issuers didn’t hold.

Defendants in today’s suits include Bank of America, Barclays, Citigroup, and more than a dozen others. The FHFA could file more suits in the coming weeks. However, the more serious enforcement actions will come from the Fed, other bank regulators, and the SEC, and these may take a few more months to prepare. Banks involved in mortgages and securities fraud may face additional lawsuits from pension funds and investors. Individual officers at banks who signed off on fraudulent transactions could face criminal indictments.

In terms of legal strategy, banks are probably correct in refusing to settle the claims against them, since no counterparty, not even the government, has the authority to offer the blanket immunity they are seeking as part of a settlement. But the result will be that the major banks will be defending these cases for the next 10 to 15 years or the rest of their corporate lives and paying legal judgements that could easily exceed $80 billion.

The NCUA is looking for new ideas after two of its plans fell through. Plans for a new corporate credit union to replace the temporary Western Bridge Corporate Federal Credit Union are on hold after it didn’t reach its capital goal by the end of the month. For now, the NCUA will continue to operate Western Bridge Corporate Federal Credit Union and look for another transition plan. Similarly, the PayNet plan, which would have launched a new correspondent credit union to replace some services provided by U.S. Central Bridge Corporate Federal Credit Union, was called off today by its board. The NCUA will have to keep U.S. Central Bridge going for now. In a statement today, it asked the affected credit unions to look for another approach.

In an unusual personnel move, Bank of New York Mellon fired its CEO for his abrasive style. The board of directors feared the pattern of drama, blame, and denial would drive away top employees, including executives. Journalists who looked into the series of events said, expressing some surprise, that there didn’t appear to be anything more to the story than what was seen on the surface.

Georgia state banking regulators closed two banks tonight, Patriot Bank of Georgia and CreekSide Bank, each located north of Atlanta with about $100 million in deposits. The deposits and assets were acquired by Georgia Commerce Bank. With the purchase, Georgia Commerce Bank is doubling in size. The two failed banks had unusually high levels of troubled assets.

Blaming the Press As a Sign of Decline

When a business or political group blames its operational problems on the news media, it is almost always suffering from internal friction that is worse than it appears on the surface.

Two current examples are Groupon and the government of Syria. Groupon is planning an IPO even as its business collapses. It was forced to amend its prospectus after news reports pointed out it was relying on a misleading accounting metric. Subsequently, the company’s CEO lashed out at the news media, blaming news reports for its “Ponzi scheme” reputation, a reputation that seems to be more likely to be the result of its own business plan and public statements. The government of Syria yesterday blamed its problems on news channel al-Jazeera, which it claimed had fabricated stories about mass murders, torture, and a top official’s resignation. The Syrian regime, though, has been spinning stories about battles with armed gangs for months. No one else has yet seen any of these armed gangs, though, and that, not the news media, is the main reason why people are asking the government about the thousands of dead and missing people. In either case, there is enormous internal stress that hasn’t publicly surfaced yet, but that we know of because of the statements pointing the finger at the media.